Good day and thank you for standing by. Welcome to the American Financial Group 2021 Fourth Quarter and Full Year Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, to Diane Weidner, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning and welcome to American Financial Group's fourth quarter 2021 earnings results conference call. We released our 2021 fourth quarter and full year results yesterday afternoon. Our press release, investor supplement and webcast presentation are posted on AFG's website under the Investor Relations section. These materials will be referenced during portions of today's call. I'm joined this morning by Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group; and Brian Hertzman, AFG's CFO. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on Slide 2 of our webcast. Some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties that could cause actual results and/or financial condition to differ materially from these statements. A detailed description of these risks and uncertainties can be found in AFG's filings with the Securities and Exchange Commission, which are also available on our website. We may include references to core net operating earnings, a non-GAAP financial measure, in our remarks or in responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release. If you are reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy. And as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now I'm pleased to turn the call over to Carl Lindner III to discuss our results.

Good morning. We're pleased to share highlights of AFG's 2021 fourth quarter and full year results. After which, Craig, Brian and I will be glad to respond to your questions. AFG's financial performance during the fourth quarter was exceptional, and a strong finish to an outstanding year. We're very pleased with the underwriting margins produced by our Specialty Property and Casualty businesses and returns in our portfolio of alternative investments that continued to exceed our expectations. AFG's total shareholder return in 2021, representing the change in share price plus dividends, was a very impressive 89%. Our diversified portfolio of specialty insurance operations and entrepreneurial culture and disciplined operating philosophy have positioned us well in a hard P&C market and an improving economy. Craig and I thank God, our talented management team and our employees for helping us to achieve these exceptionally strong results. I'll now turn the discussion over to Craig to walk us through AFG's fourth quarter and full year results, investment performance and our overall financial position at December 31.

Thank you, Carl. As you'll see on Slide 3, AFG's core net operating earnings were a record $11.59 per share for the full year of 2021, generating a core operating return on equity of 18.6%. Earnings from AFG's discontinued annuity operations, the significant gain on the sale of this business and other noncore items contributed meaningfully to full year net earnings per share of $23.30 share. AFG's net return on equity was a very strong 37.5% in 2021. We're very pleased to have achieved a valuation of approximately 140% of adjusted GAAP book value on the sale of AFG's annuity business. This calculation includes proceeds from the sale and dividends paid to AFG in conjunction with the sale. See Slide 4 for additional details. Capital management is one of our highest priorities. Returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and our confidence in AFG's financial future. The successful sale of our annuity business provided a unique opportunity for us to return $2.7 billion to shareholders during the year. We paid $2.4 billion in dividends during the year, including $2.2 billion in special dividends and $176 million in regular common stock dividends and made share repurchases totaling $319 million. Our quarterly dividend was increased by 12% to an annual rate of $2.24 per share, beginning in October of 2021. Growth in adjusted book value plus dividends was an impressive 34.4%. Turning to Slides 5 and 6, you'll see that the fourth quarter 2021 core net operating earnings per share of $4.12 were more than double those in the prior period, producing an annualized fourth quarter core return on equity of 28.1%. Net earnings per share of $4.18 included after-tax noncore realized gains on securities of $0.06 per share…

I'd like to begin by congratulating Gary Gruber on his upcoming retirement as Great American's President and Chief Operating Officer. Gary has played a significant role in the tremendous growth and success of our Property and Casualty business over the course of his nearly 45-year career with the company. Gary is a treasured colleague and a longtime friend to me and many others. It's been an honor to work alongside him and I wish him many years of health and happiness in retirement. Gary, thank you for your contributions and service to Great American and AFG. With Gary's retirement, David Thompson has succeeded him as President and Chief Operating Officer of Great American's Property and Casualty Group, effective February 1. David is the 18th President in Great American's 150-year history. His executive leadership experience overseeing numerous Great American Specialty Property and Casualty operations positions us well for growth and success. Now turning to a review of the quarter. Results in our Specialty Property and Casualty Group were outstanding, as you'll see on the overview on Slide 10. Fourth quarter pretax core operating earnings and AFG's P&C Insurance segment established another record for the fourth time this year at $485 million. Specialty Property and Casualty insurance operations generated an underwriting profit of $281 million in the 2021 fourth quarter, an impressive 57% increase year-over-year, driven primarily by higher year-over-year underwriting profitability in our Specialty Casualty and Property and Transportation groups. Despite the impact of devastating tornadoes in Kentucky and fire-related losses in Colorado, our catastrophe losses were a very manageable $25 million. Underwriting margins across our portfolio of businesses were excellent. In overall, Specialty Property and Casualty combined ratio was an exceptionally strong 80.7% and improving 5.5 points from the prior year period. The fourth quarter 2021 combined ratio included 1.8…

Thank you, sir. [Operator Instructions] I show our first question comes from the line of Mike Zaremski from Wolfe Research. Please go ahead.

Hi, guys. This is Charlie on for Mike. Thanks for taking our questions. On Craig’s comment on the $750 million of returnable capital, what is driving the increase relative to your last update? Is that based on income that you expect to generate during the year? Or how should we think about that?

Yes. The $750 million is based on the assumptions in our model, that’s what we expect to generate during the year. So if we – if things go as planned, we would have $750 million of additional available just from the excess capital that we generate.

Got it. Okay. That makes sense. And then just on the net investment income upside that Craig spoke to, is that more from the floating rate debt that you guys hold? Or would you potentially extend the duration of your portfolio?

Yes. So we actually have started to put some money to work with the significant increase in rates. But the – I mean, we would benefit meaningfully. What we put in our model was an assumption of 4 Fed rate increases kind of spread throughout the year. And we did not assume that we were going to lengthen duration significantly. So I mean if rates continue to climb, and we do link them duration that certainly would be a positive to net investment income.

Got it. Okay. Thank you.

Thank you. I show our next question comes from the line of Derek Han from KBW. Please go ahead.

Good morning. Thanks for taking my question. I just wanted to dive into the 2022 outlook a little bit. What would kind of get you to the high end of the combined ratio ranges for Property and Transportation and the Specialty Financial segments, given that you’re still seeing very good pricing and growth? So I just kind of wanted to understand what the risks are for – to put you at the higher end of the combined ratio guidance.

Well, I think probably our crop business, for instance, probably is a line that has the most variability depending on what type of year you have, you can go from a drought year where you don’t make anything to great years where you make a lot. That’s a business over time that we’ve earned very high returns on and have done well on average, I think, in a good part because of the broad mix of business that we have in the heartland for corn and soybeans and lower exposures in places like Texas and some of those types of states and now. So I mean that would – when you’re focused on the property and transportation, the other thing would be we factor in kind of an average year of catastrophes. If you had a more major catastrophe, naturally, that could impact you to the higher end of a range as well as the industry. Now the good news in our case is, generally, we have a much lower relative exposure on the catastrophe side. So that’s really helped us over time, have more predictable combined ratios in that. On the Specialty Financial side, our lender placed property business also has catastrophe exposure in that. So things like wildfires or hurricanes or those types of events, it would probably be those kinds of things that could push the specialty financial combined ratio to the higher end.

Got it. That’s helpful. Sorry, go ahead.

Yes. I think those would be the main things that would come to mind.

Okay. That’s helpful. And then I just wanted to ask about the loss trend. You had said that maybe it was 2.7% last quarter. Is that still holding for 2022? And then within the social exposed lines like D&O, are you seeing any acceleration in social inflation that makes the loss trends higher?

Yes. I think – I kind of round it up a little bit. I consider our prospective loss ratio trend as we would be about 3% overall today. If you exclude workers’ comp, which has had some really very favorable trends, our overall prospective loss trend as we’ve adjusted is more like 5%. So the 5% compares to the 12%, excluding comp rate that we got this year. I think we just – I just talked about our guidance, excluding comp on pricing was 6% to 8%, if that gives you kind of a feel for things. And then overall, compared to the 3%, we achieved about 9% in price in 2021. And our guidance is for 5% to 7% in that. So I hope that gives you a little color.

Yes, that’s really helpful. And then last question for me. Are you seeing any impact from wage inflation? Or are you kind of insulated from that, given that you have the unique profit-sharing plan in place?

You mean within our own employees or are you saying impact? We are seeing positive wage inflation impact in businesses like workers’ compensation, which actually works to be a favorable. As we look at our loss ratio trend, we’ve always been a little different than the industry in talking about loss cost trends. We talk loss ratio trend, which includes which offsets loss cost trend by favorable types of things like wage inflation and particularly in works comp, we would have probably a couple of points of favorable wage inflation that is probably helping our results. Are you speaking to internally to AFG?

Yes. I was more curious about your employee base, whether you kind of have to pay out for talent or maybe to pay out more to retain talent.

I think certainly, everybody probably has had to – from the last couple of years is probably are increasing their wage, their overall average wage increase kind of in response to inflation. I think we’re very blessed in that when we look at our turnover, really things haven’t really moved. It’s very stable. So – but I think in response to just our employees facing more inflation, we have made some adjustments to reflect that. But that’s all built in guidance.

I think it’s important to remember, too, we have a sticky long-term compensation plans where our business units are based on accident years as they develop out. So there’s a good long-term alignment there and a great work culture here at Great American as well that helps keep our leaders happy and stable here at the company.

Okay. Thank you very much.

Thank you. I show our next question comes from the line of Greg Peters from Raymond James. Please go ahead.

Good morning. This is actually Sid Schulz [ph] calling on behalf of Greg. Just one question and it pertains to commercial transportation. When just looking at the industry, it seems that we’re seeing higher litigated claims and larger settlements. And I’m hoping maybe you guys can just provide your perspective on these trends or expectations or what you guys are seeing moving forward?

Yes. I think we identified probably eight or nine years ago. We were probably one of the first companies to identify those, the severity trends in the commercial auto liability side. And they definitely are continuing. And I think that’s one reason why even after eight, nine years of taking rate, I think in the fourth quarter, we still took an 8% rate increase in the commercial auto liability portion of our business. Yes, it’s definitely real. And I think also what now as the economy is coming out of the pandemic, there’s more miles being driven out there more vehicles, more miles. And I think that also has an impact on things. That’s why we think as we look this year, we’re continuing to take rate, and we want to be very careful. Even though our commercial auto business is performing very well, achieving for the year and the last couple of years, achieving our combined ratio and return on equity objectives. We still feel that in the commercial auto liability side in particular, that we need to continue to take rate – and even on the physical damage side, yes, with labor shortages and used vehicle parts, prices going up, that does impact commercial auto, the same as it does impact private passenger auto. In some ways, maybe even more. With respect to if you have specialized vehicles like moving vans or moving trucks, they may be harder to replace or to fix than the average passenger van or something. So – we’re still going to take rate on the physical damage part of our business this year also.

Got it. Thank you.

Thank you. I show our next question comes from the line of Mike Zaremski from Wolfe Research. Please go ahead.

Hey, great. I was on another call, so thanks for taking our follow-ups right now. I guess, back – sticking to the question of on loss trend, a number of companies have been – and we’re seeing data points too, pointing to kind of frequency trends on the casualty side being better than expected due to potentially a number of reasons, including the courts being still not fully reopened. But some firms are also kind of – and the data points are pointing to severity, still being higher than expected and some firms have kind of taken up their perspective loss picks. And I know you haven’t taken up your perspective view of inflation. But is the – is this – maybe if you can bifurcate, is frequency kind of the good guy still as severity is trending higher? Or still kind of severity is kind of in line with what you guys have been expecting?

Yes, that’s an impossible question to answer. Where we have 35 different specialty businesses, it would vary business by business. When we – you take a look at our perspective, loss ratio picks for businesses like D&O and public D&O, it would reflect our – which is on our overall D&O business. It would be like a 7% perspective loss trend. And it’ll probably be a bit higher if we just took the public D&O part of that. So that reflects our quarterly actuarial work where we review where we think things are going and our own trends and that. So the same thing applies, for instance, on specialty human services, which is our nonprofit part of our business. Our perspective loss ratio trend pick is around 8% on that business just with the trends that we see on that. Our business is doing fine, is earning targeted returns in that. But based off of what we see out there and with the severity on claims and that whole sector, we’re just being – we think we’re being prudent in how we’re looking at that. So each business is a little bit different in that. You go to a business like workers comp in that. And our workers’ comp business, for instance, the frequency is actually down, and the severity is normalizing now in that – but when you take a look at the positive impact, I think that I just mentioned from exposure change, wage inflation and that, the overall loss ratio, loss ratio trend there is pretty stable.

And Carl, I appreciate that – the color is helpful. You have also a unique commercial auto business, but maybe you can touch on commercial auto since there’s some increasing chatter about some pressures there in terms of finding qualified drivers and then some changes in ages and the ability for drivers to younger age drivers to move intrastate?

Yes. As I – I think in the previous questions in that, elevated severity continues to be a factor, as I mentioned, and we’re continuing to take rate. I mentioned also because of the – on the physical damage side, too, because of the cost of labor and parts. We’re continuing to take rate there. Those are the trends we’re seeing on the severity side. Claims frequency has returned some, but still is slightly less than pre-pandemic levels. If we go back to before the pandemic hit, though about every month, starting in about the second quarter of last year. The frequency has kind of ticked up higher than the year prior, and it seems like it’s been on an upward trend. So even though we’re meeting or beating our targeted returns in commercial auto, we’re very careful about continuing to take rate because on the frequency and severity side, we’re seeing the trends that require additional rate. So that’s our perspective on that.

Okay. Great. And maybe one follow-up on capital since this is another area we get a lot of questions on. In terms of the overall excess capital position of, I believe, now still over $2 billion, so a sizable amount, is a good portion of it effectively trapped due to leverage governors? And appreciative of your guidance, and there still will be plenty of capital return. But thinking the larger $2-plus billion number over the – in the near term.

This is Craig. I wouldn’t say that it’s trapped permanently. There are levers we could pull to untrap it. I mean main one being deeming the debt issue that matures in 2026. So we said today that – per our model that throughout 2022 – by the end of 2022, we would have around $750 million to use to pay special dividends or repurchase shares. If we would call the 2026 debt issue, and I’m not saying that we’re looking to do that, but if we had a great use for excess capital to repurchase shares, pay special dividends or whatever. I mean it is callable. But the $760 million would go to $1.7 billion at the end of the year. So the bulk of it would be unlocked if we would make a decision to...

To where rates are going, if rates move up as everybody thinks, there could be better and better opportunities to repurchase some debt.

Yes. Understood. And maybe lastly, and maybe if you discussed this already, I missed it, then you can let me know. But in terms of uses of excess capital, there was an M&A deal you entered into recently. I think there was more technology and more of a technology type of focus. And I believe there’s a good deal of goodwill associated with that acquisition. But maybe you can kind of touch on that acquisition, what excites you about it and whether there’s other kind of maybe similar acquisitions that you’re looking at that have more of a technology infrastructure lean to them?

Sure. I mean, I don’t think it’s a – I wouldn’t say that it’s a important strategic position of the company to be out there trying to buy insurtechs and that’s a significant component of our M&A. But when we see something that’s – when we believe in something like machine learning and artificial intelligence and the future of something like that and also potentially through that lens, the potential impact and improvement in our own business and the use of that across maybe 35 businesses, that part excites us. I think the other aspect of that is because of the Verikai acquisition, we have the opportunity to start a new business unit, which is focused on the medical stop-loss insurance business, probably more of a focus on small and underserved risk. When you look at the marketplace as a whole, but we would be using Verikai’s predictive risk tool. We began quoting and learning the business some in the fourth quarter. The business is being done through a relationship with an MGU called radian [ph] which we have a minority investment, and we’ll provide the paper for the business, and we’ll share risk 50-50. So in this case, I think we have the ability using Verikai’s technology in predictive risk tool to start a new business, which we think is in a potentially underserved market. And I think we may have the ability to approach that market in a way that’s a little bit different and would provide a competitive advantage long term. Again, we’ll be in a learning phase, and there won’t be much impact from the medical stop loss business in 2022. I think 2023 probably would be more meaningful to us. So I’m very excited about Verikai will run on – they’re run as an independent…

Very helpful. Thank you.

Thank you. I’m showing no further questions in the queue. At this time, I’d like to turn the call back over to Ms. Diane Weidner for any closing remarks.

Thank you, Dolman. And thanks to all of you on the call for your time today. We look forward to talking with you again next quarter when we share our first quarter 2022 results. Thank you so much, and have a great day, everyone.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.